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Treasury Select Committee raises the independence issue over the Bank of England

The Treasury Select Committee has produced one of its most insightful reports this week on the accountability of the Bank of England. It puts the issue of accountability so firmly on the agenda that it actually goes much further and raises the question of whether a central bank should be independent of political control.

This has been the conventional wisdom among the major political parties for the last 15 years and when Gordon Brown moved quickly to cut the Bank free of political control in 1997 he was loudly applauded by the Liberal Democrats and quietly encouraged by the Tories. I have never supported the independence of the Bank of England and the Treasury Select Committee report's insightful analysis thoroughly vindicates that stance.

Of course the headlines this week have focused on the proposal that future governors should serve only a single eight year term - they are currently appointed for five years which can be renewed - and that the appointment should be subject to scrutiny and potential veto by the Treasury Select Committee. This has been sold by the committee's chairman Andrew Tyrie as a way of ensuring that, once appointed, the governor would be free from political interference: the rest of the report, however, sets out an aggressive agenda for future political engagement with the Bank.

Mr Tyrie summed it up well when the report was published on Monday: "Scrutiny of the Bank should reflect the needs of 21st century democracy. That means clear lines of accountability and more information made available to Parliament. It should be crystal clear who is in charge at a time of financial crisis. On all of these issues the government's draft legislation would benefit from improvement". It is in time of crisis that the select committee sets out a case for the Bank submitting to direct political control and it is these recommendations that I expect to meet the fiercest opposition from the Bank after the proposed veto on the appointment of the governor.

The recommendations on page 54 of the report do not leave much doubt as to who the select committee thinks should be in charge when there is a crisis:

"We strongly recommend that the definition of what constitutes a "material risk" for the purposes of Clause 42 of the draft Bill be contained in the forthcoming legislation. This definition should also take account of the fact that major liquidity operations by the Bank require Treasury approval--the material risk of these too must require notification to the Treasury....

"We further recommend that the Draft Bill be amended so that this early warning triggers a discretionary power for the Chancellor to be able to direct the Bank if he or she so chooses. The Bank should be required to provide such an early warning to the Chancellor as soon as the FPC becomes aware of a possibility of a material risk to public funds...

"To ensure proper accountability to Parliament, the responsibility of the Chancellor for all decisions involving public funds or liabilities in a time of crisis should be stated in the draft Bill".

These recommendations should start the debate about independence and political control of the Bank of England, one that should have been had a long time ago but which, with people pitching tents in the City to protest about their lack of influence over the financial world, is very much a debate for our time.
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